It’s Not of the China Price. It’s the End of Cheap Crap

Sunday, April 24, 2011 4:43
Posted in category The Big Picture

Back in 2008, before the global economy blew up, there was a lot of talk about the end of the “China price”. That, as the costs of China rose, firms would move themselves away from China …. to Vietnam, India, Bangladesh, Mexico, etc… and at that time I found the arguments lacking in depth. In short, the economics and operations of such a “move” were unrealistic.

In the recent NY Times article Inflation in China poses big threat to global trade the author stokes the flame again:

High inflation endangers China’s status as the low-cost workshop for the world.

Which to me is a conclusion that fails to frame what is going on… that, instead of following a line that the “China price” was gone, the author should have recognized (1) China is, and will be for a very long time, the lowest cost producer globally for the vast majority of what is currently being produced here and (2) That it is actually the end of the “Cheap crap” price that is actually disappearing.

It is a model, the “Cheap crap” model, that survived only because of a series of unique economic conditions and externalities existed, and as these are removed, the prices globally are going to go up.

Call it inflation if you like. Call it paying the full cost of production as the next step. But either way, as firms like Walmart find it hard to maintain their prices, and McDonald’s begin warning of inflation, it should become clear that this is a condition that is less about “China pricing” and more about the end of an economic model.

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11 Responses to “It’s Not of the China Price. It’s the End of Cheap Crap”

  1. Renaud says:

    April 24th, 2011 at 6:23 am

    But there will always be a need for “cheap crap”. From Africa and the Indian subcontinent, from China’s domestic market… And from discounters in developed countries. 
    Do you mean that crap will get more expensive? Or that it will be made somewhere else?

  2. Rich says:

    April 24th, 2011 at 6:40 am

    Hi Renaud.

    Sorry. I should have been a bit more direct. Cheap crap is going to get more expensive, and that while there will be come movement away from China, China will continue to be the lowest cost provider that maintains the bottom rungs of retail shelves.

    R

  3. Renaud says:

    April 24th, 2011 at 7:04 am

    Rich,
    Yes, I agree with that. And, after 2020, cheap crap will leave China at a much faster pace. But it will probably take about 15 years.
    So much for all these journalists writing that “everything is changing in China right now”…

  4. Rich says:

    April 24th, 2011 at 7:21 am

    Renaud

    In 2020, I think the picture could be either completely different (i.e. no more crap made in China) or the exact same (people talking about Vietnam and India).

    There are a couple of trends than lean towards the first, or at least catalyze movement, in that China’s workforce is going to be older and its’ economy presumably more mature and infrastructure investments in India and Vietnam will open up more of those countries.

    However, in my mind, the biggest issue pushing against this is the simple fact that China has mass, and that with many of the investments in China still far from paid off, and may investments made with accessing China’s markets in mind, executives are going to resist moving without a compelling reason. Even if China costs a few points more.

    Either way, we are going to be seeing more articles titled “the end of China”, and one can only hope that they begin incorporating a deeper level of analysis when they are written than what is currently being put out.

  5. Renaud says:

    April 24th, 2011 at 8:31 am

    Interesting… Let’s see what the future is made of!

  6. Etienne says:

    April 24th, 2011 at 9:21 am

    I believe that “cheap crap” might leave China faster than some people hope and therefore, the price of such crap will increase because very few places have the size and infra to keep up with the hunger of consumer across the world for cheap products. Any business model relying on product relying on cheap unqualified migrant workforce would better revisit and find alternatives. I heard unconfirmed rumors saying that some Chinese officials are advocating for an increase of minimum wage by 20% . . . per year, for several years.

    It is also a clearly stated goal in the last five year plan to upgrade industry and the service part of it. It would be easy to disregard that as just words, but dangerous.

    I always believed that the trend in China was toward higher end products and services and this is why we always focused on industrial products. But I have also seen a few suppliers of “cheap” basic consumer products starting to move up the value chain, not in terms of the product itself but in terms of the service they propose: fast delivery terms, special payment conditions, better understanding of the product and some new ideas. It seems that they are trying to eliminate the trading companies that usually provided that to the buyers. Not everyone will succeed but I am sure that some will.

    Traders, beware.

  7. When will cheap manufacturing leave China? says:

    April 24th, 2011 at 9:44 am

    […] quick to jump to conclusions. Which pushed Richard Brubaker to write a thought-provoking article (It’s Not of the China Price. It’s the End of Cheap Crap) on his All Roads […]

  8. Roy S. says:

    April 28th, 2011 at 11:11 pm

    You need to reword your title it’s incorrect.

  9. X Liu says:

    May 3rd, 2011 at 8:03 am

    Quote 
    “However, in my mind, the biggest issue pushing against this is the simple fact that China has mass, and that with many of the investments in China still far from paid off, and may investments made with accessing China’s markets in mind, executives are going to resist moving without a compelling reason. Even if China costs a few points more.”
    I think this is probably why you’ll see a gradual transition and it’ll happen when China wants it to happen. The potential wage differences between China and Vietnam or China and India, is still a HELL of a lot smaller than the wage difference between China and America. Besides Vietnam is kind of small and India sees that kind of manufacturing as below them (they’re only focusing on growing their elite industries)

  10. Fabrizio says:

    May 4th, 2011 at 7:56 am

    I do agree that it could go either way, and it is a bit too drastic to place price increase simply on inflation shifts.  Nice post, thought provoking indeed.  Susan Shirk speaks about many of the forces that can influence these changes in her “China, Fragile Superpower”.  It is important to view the costs of production not so much in relation to the past, but relative to the current market.

  11. Andeli says:

    May 15th, 2011 at 10:50 am

    There is one isse that has not been mentioned here: food inflation and the reasons for it. The large Chinese work force is changing its food consumption as we write and that is why it’s wages have to go up. The amount of arable land in China is shrinking faster now then ever before because of the large fixed asset investments. There is also a huge lack of real agriculture reform because prices are kept artificially low. Yields from agriculture don’t have the same productivity curves as the production industry and therefore supply cannot meet demand when liquidity is being handed out at the pace we are seeing right now. Therefore I would think that the slower supply (in relations to demand) of food and energy will be a larger factor in the next 10 years then they where in the last 10 years. If this is true then mass is no longer a advantage because when everyone needs these limited resources then the ones with the greatest net demand will lose out because when it comes to food and energy every country takes care of its own first. The price of labour in China is not going up because the labour force is shinking its is because of too much liquidity and too few resources to meet demand. Extreme waste of resources will hurt producers more in the future then it has in the past

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